55718245 business cycle

8/6/2019 55718245 Business Cycle

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BUSINESS CYCLE


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Business Cycley Deviation from trend growth (i.e. fluctuations in

GDP around its trend) y A business cycle is a sequence of economic activity in anation's economy that is typically characterized by four phases that repeat themselves over time. y Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to t

welve years, with most cycles averaging about six years in length. y But the term "business cycle" is still primarily associated with larger (regional, national, or industry wide) business trends.


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Stages of the Business Cycle


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Stages of Business CycleExpansion y Peak y Contraction y Troughy


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Expansiony The expansion phase of the business cycle represents a period of economic growth. y This phase includes an increase in the number of jobs available and an increase in the cost of goods. y Employers expand their ranks of employees, a corresponding increase in earned income enables working consumers to afford items produced by businesses. y Businesses produce more goods during the expansion stageof the business cycle. y During an expansion stage, an economy normally produces

a GDP indicating high levels of efficiency.


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Peaky The peak stage follows an expansion phase. y The peak stage demonstrates the height, the pinnacle of the expansion phase. y In a peak phase, an economy experiences little or no unemployment. y The cost of goods continues to increase, butnot as rapidly as in the expansion phase, as production levels satisfy consumers' demand for goods almost exactly. y The business cycle's peak stage reveals a high GDP during its length. y An economy's peak stage is normally recognized afte

r it has ended, however. Only a decrease in GDP distinguishes a peak stage fromits predecessor, the expansion phase.


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Contractiony The contraction phase of the business cycle represents the opposite of the expansion stage. y Employers cause an increase in an economy's unemployment by reducing the number of their employees. y Workers lose their jobs, earned income decreases and nonworking consumers can no longer afford goods produced by businesses. y An economy's GDP will be lower during the business cycle's contraction phase than during the cycle's expansion and peak stages. y If GDP falls for consecut

ive quarters, the contraction stage experienced by an economy may be a recession.


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Troughy The business cycle's trough stage directly contrasts its peak phase. y Duringa trough stage, an economy experiences a high unemployment rate. y Increases inthe cost of goods do not occur as consumer demand and confidence levels remain low. y Similar to a peak phase, a trough stage can only be recognized after it passes. y A trough stage will be identified by a decrease in an economy's GDP whencompared with its level during the preceding contraction phase. y If an economy

's GDP decreases or remains at a low level for an extended number of fiscal quarters, the economy's trough stage may be a depression.


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Characteristics of Business CyclesRecurrent, systematic fluctuations in the level of business activity: y real GDPgrowth rate y inflation y unemployment


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Characteristics of Business Cycles Systematic FluctuationsPeak Trough Peak Contraction Expansion120 115

(Recession)

Real GDP

110 105 1006

Unemployment Rate (percent) Inflation Rate (percent)

4 2 0

10 8 6 4 2 0


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Factors that shape Business Cycley Volatility of investment spending y Momentum y Technological innovations y Variations in inventories y Fluctuations in government spending y Politically generated business cycle y Monetary policies y Fluctuations in imports and exports


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Real Business Cycle Theoryy Both growth and business cycles are caused by

aggregate supply shocks y Business cycles are outcome of optimizing market mechanism y aggregate demand is endogenous y No role for government in changing the nature of business cycles


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Keynesian View Prices and wages may be sticky

may not adjust to

equilibrate markets Conduct countercyclical aggregate demand management Business cycle largely the result of destabilizing movement in aggregate demand New Keynesi

ans also acknowledge aggregate supply shocks matter Government must step in to shore up aggregate demand policy can alter the business cycle.


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Forecasting Business Cycles Direction of Movementy Procyclical - with the cycle. Increases during

expansions and declines during contractionsy Countercyclical - goes against the cycle y Acyclical - no observable relationto the cycle


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Forecasting Business Cycles Timingy Coincident - matches the cycle. Peaks and troughs

occur at roughly the same time.y Lagging - peaks and troughs follow a few months

later.

y Leading - peaks and troughs occur before those of

the cycle.


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Keys to successful Business Cycley

y

Flexibility: Part of growth management is a flexible business plan that allows for development times that span the entire cycle and includes alternative recessi

on-resistant funding structures. Attention to Customers: This can be especiallyimportant factor for businesses seeking to emerge from an economic downturn. Staying close to the customers is a tough discipline to maintain in good times, butit is especially crucial coming out of bad times. "Your customer is the best test of when your own upturn will arrive. Customers, especially industrial and commercial ones, can give you early indications of their interest in placing largeorders in coming months."


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Keys to successful Business Cycley Objectivity:

Small business owners need to maintain a high level of objectivity when riding business cycles. Operational decisions based on hopes and desires rather than a sober examination of the facts can devastate a business, especially in economic down periods. y Long-Term Planning: Consultants encourage small businesses to ado

pt a moderate stance in their long-range forecasting.


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Keys to successful Business Cycley Study:

Timing any action for an upturn is tricky, and the consequences of being early or late are serious. For example, expanding a sales force when the markets don'tmaterialize not only places big demands on working capital, but also makes it hard to sustain the motivation of the sales-people. If the force is improved too l

ate, the cost is decreased market share or decreased quality of the customer base. To strike the right balance between being early or late a company needs to listening to economists, politicians, and media to get a sense of what is happening is useful, but it is unwise to rely solely on their sources. The best route isto avoid trying to predict the upturn. Instead, listen to your customers and know your own response-time requirements.


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55718245 business cycle

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